Ottawa falsely assumes perfection from centralization
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The federal government regards its case for a single national securities regulator as an evolutionary advance - rather like the ascent of man from great ape to homo sapiens. (Imagined in the usual way, with a sequence of primitive cave men standing progressively more erect, this metaphor positions the federal regulator at the head of the line, wearing a suit and talking on a cellphone, and provincial regulators five or six places back, stooped over, wearing furs and hoisting clubs.) Federal regulation is inherently superior to provincial regulation, isn't it?
Not necessarily. In an intellectually devastating critique, Queen's University economist Thomas Courchene argues that the federal government's case fails because it rests almost solely on presumptive logic, on assumptions rather than on facts - assumptions that 109 other countries with national regulators are necessarily right and that Canada, the only country with provincial regulation, is necessarily wrong.
Neither of these assumptions, Prof. Courchene says, has been proved. Indeed, he says, the Canadian experience demonstrates that decentralized regulation has produced one of the best regulatory systems in the world. This unique "pan-Canadian" achievement, he says, is a national achievement of the first rank and proves that government services can be "national" without being "central."
The Supreme Court of Canada heard arguments last week from the six provinces that refuse to cede to the federal government their constitutional right to regulate the securities industry: Alberta, Quebec, Manitoba, Saskatchewan, British Columbia and New Brunswick. In a paper filed with the courts as part of Alberta's defence of provincial jurisdiction, Prof. Courchene champions the much-maligned status quo. For such a prominent and respected academic, this is an exceptionally contrarian position.
The Canadian securities industry, Prof. Courchene says, is a success story - so much so that the Santa Monica, Calif.-based Milken Institute last year ranked Canada No. 1, out of 100 countries, on the breadth, depth and vitality of its capital markets. This was no accident, he says; rather, it is the product of "arguably the most decentralized federation in the world." Switzerland, famously decentralized, doesn't come close.
Canada is decentralized constitutionally (by the division of powers), linguistically (English, French, aboriginal languages), culturally (Quebec, multiculturalism, first nations) and legally (common law and civil law). Spread across the second-largest land mass in the world, its provinces differ radically in "economic geography." Yet the provinces have assembled an integrated, "pan-Canadian" securities regulation "that accommodates diversity, embraces dynamic efficiency and regularly ranks among the very best in the world."
In this decentralized universe, Prof. Courchene says, the provinces regulate their own markets in their own ways: "Alberta has oil and gas markets. British Columbia has mining and mineral exploration. Ontario has financial services. Quebec has converted the Montreal Stock Exchange to a derivatives exchange ... Finance Minister Jim Flaherty [has himself noted] that Canada has almost 3,800 publicly listed companies, far more per capita than many other developed countries." With a population nine times Canada's, the U.S. has 5,100 listed companies.
The federal government has ostentatiously championed the free flow of goods, services, capital and people within the country - so much so that people might think that the provinces are the primary barrier to trade. Yet the provinces have voluntarily reduced trade barriers and Prof. Courchene argues that the federal government itself is now responsible "for the most significant barriers to free trade within Canada."
Canada's provincial regulators came through the financial crises of the past few years looking good. "It is most impressive," Prof. Courchene says, "that we effectively escaped the financial carnage that befell the Americans, the U.K. and much of Europe." It is highly unlikely, he argues, that a single national regulator would have performed better.
For corroboration, he cites Yale Law School professor Jonathan Macey. "The failure of a national securities regulator [the Securities and Exchange Commission] in the United States is not a matter of too much or too little regulation," Prof. Macey says, "but rather the natural consequence of excessive centralization." In centralized regulatory systems, the risk exists that regulators will get too intimate with the companies they oversee: "regulatory capture."
In a decentralized system, the regulated companies in one province will never "capture" all the regulators in the country at the same time. But this is ancient wisdom: It's almost always better to diffuse power than to concentrate it.